Many businesses across the country are tapping into federal aid to help keep staff employed and their doors open. One of the most relevant funding opportunities for business owners is the Paycheck Protection Program (PPP) loan. With so many legislative and regulatory updates pertinent to PPP loans, we’ve created an entire resource center to keep track of the moving pieces.
Among these pieces are questions about PPP forgiveness treatment within Federal Acquisition Regulation (FAR) compliance requirements. With partially competing views on how to treat loan forgiveness regarding the overhead rate calculation between the Defense Contract Audit Agency (DCAA) and Federal Highway Administration (FHWA) guidance, we’re outlining the business implications for this evolving topic.
Defense Contract Audit Agency (DCCA) Guidance
The most recent DCAA Guidance released in late January continues to direct users to the FAR credits clause but includes an FAQ section for PPP loans. In this section, DCAA clearly states that if a borrower uses PPP funds to pay for indirect costs—like facility rent—and secures forgiveness, the borrower’s overhead rate should be reduced accordingly. But what about the timing of that reduction? DCAA also asserts that the forgiveness should not be captured until the loan is officially forgiven. This is an area of contention, as the Generally Accepted Accounting Principles (GAAP) allows companies to capture forgiveness potentially in the year the expenses were incurred, which could be in advance of the year in which the forgiveness is received.
Similarly, flexibly priced government contracts that used forgiven PPP funds for direct payroll costs must be credited to those contracts. While this is far from a clear line in the sand, some would interpret this to confirm that firms should have carefully documented how they spent the PPP loan proceeds, and thus are responsible for any funds that were spent and forgiven related to government contracts.
While the DCAA expects all indirect costs paid with forgiven funds to be credited to the overhead, they confirm that commercial projects’ payroll costs do not create a credit or refund for the federal government.
Federal Highway Administration (FHWA) Guidance
Without congressional direction or intervention, architecture and engineering firms (AE) working on federal, state, or local projects must follow all existing regulations and cost accounting standards, regardless of how the PPP may interfere. According to FHWA guidance, AE firms cannot use PPP proceeds for direct costs on federal aid- or federal lands highway program-funded contracts. Some firms are rightly concerned, as this guidance arrives not only after funds have been disbursed and spent, but also after many firms have already submitted forgiveness requests. One might argue then that the PPP loan should have been used for indirect labor, as the government pays for direct labor costs. As such, the forgiveness should be credited to the overhead rate.
The FHWA guidance includes four points on loan forgiveness under the PPP, and how it will impact direct and indirect costs billed through the FHWA program:
- AE firms should continue to bill costs in accordance with the contract, including both direct and indirect costs.
- AE firms cannot use PPP loan proceeds to pay for the direct costs on a federally funded state DOT project. This would result in an unauthorized donation to the project, and conflict with the contract’s terms and conditions.
- AE firms may use PPP loan proceeds for indirect costs, which would then require an adjustment to their overhead rate in accordance with 48 CFR 31.201-5 (the FAR credits clause). All credits to indirect costs should be reflected in the subsequent adjusted indirect cost rate. If an AE firm can apply the indirect cost credit on existing contracts, the contracting agency may allow the consultant to do so.
- All applicable credits are to be applied based on an equitable allocation to all benefiting cost objectives in accordance with 48 CFR 31.201-4. The indirect cost rate credit should only be applied until the credit is recovered fully. If adjustments to an AE consultant’s indirect cost rate have no bearing on the award or contract type (e.g., firm fixed price or lump sum contract), adjustment to that contract would not be required.
Breaking Down the FHWA Guidance
If you have a swirl of questions popping into your head, you’re not alone. This is where things get even more complicated. There are several key considerations—here are the top questions that come to mind after reviewing the guidance provided:
- Did the business track every PPP loan dollar they spent? Maybe it started that way, but when the covered period was allowed to shift to 24 weeks, that dollar-for-dollar tracking potentially went out the window in the churn of daily business. The forgiveness application doesn’t appear to require such detailed tracking, so some businesses have taken the position that they can retroactively re-determine what the PPP funds were spent on, assuming they kept track (or did their best to do so) in the beginning.
- Did the business already apply for forgiveness? Given this guidance, forgiveness requests may require an allocation of costs to indirect labor, despite the fact that this was not mandated in the initial guidance.
- Is it appropriate, given FHWA’s final point regarding equitable allocation, for a consultant to retroactively select which expenses they say the loan covered? And if so, then those companies who have a higher number of firm fixed price or lump sum contracts are at an advantage, given they won’t need to reduce their overhead rate over those who only have flexibly priced contracts.
- What about the comment that the credit should only be applied until it is fully recovered? This could potentially be the most challenging aspect to track. And what would be the mechanism to have the agency change the rate once the firm has stated they have allowed for full recovery of said credit?
Unfortunately, the complexities compound from there. What about working in different states, with varying rules regarding applying the overhead rate and whether they apply it prospectively versus truing up using provisional rates? How do we track when we’ve reached full recovery of the credit? What if each agency thinks its fair share is more than what you’ve calculated?
Many firms used PPP loans to maintain cash flow, and some have since returned the funds altogether. For those seeking forgiveness, the above questions and concerns need to be considered regarding labor and other costs paid directly with PPP funds.
Ultimately, if a firm chooses to pursue loan forgiveness, the costs must be carefully and clearly allocated in the forgiveness application and the firm’s records. Firms will need to determine how they will account for and capture the recovery to the government, so they’re not put into a less favorable position than if they’d gone without the PPP funds.
Where We Stand + Other Considerations
Congressional testimony is ongoing, and Congress has yet to decide what, if any, intervention they will provide. The AE community is left with confusion on whether to follow FHWA, DCAA, or GAAP, as all three have potentially conflicting guidance. Additionally, the concern over how a reduced rate will impact businesses in the coming years keeps many business owners up at night. Many are wrestling with how to comply with the guidance while managing rate expectations.
To add to the escalating challenges, the Employee Retention Credit (ERC) offers another level of complexity. If eligible in 2020, the interaction between the ERC, PPP loan amount, and headcount requirements may dictate how the credit is treated. For 2021, the credit is potentially much more significant, and PPP2 could factor into calculations, and the headcount numbers may have changed.
As firms prepare to apply for loan forgiveness and other relief programs, business owners should carefully consider the following questions:
- Did I track use of PPP loan funds, or do I feel that was necessary? And if not, can I gather enough detail to support the forgiveness application? What is that impact on my overhead rate given the above guidance?
- What risk am I assuming by retroactively allocating the PPP loan amount used for commercial, firm-fixed-price, or lump sum contracts?
- What is my current overhead rate? How and when will it change as a result of expected or actual forgiveness?
- How do I apply the Employee Retention Credit to my overhead rate, and when?
- Looking forward, should I pursue more commercial contracts and fewer government contracts? What is the proportion of my backlog to evaluate the implications?
- How do I determine when the credit was completely recovered, as noted on FHWA’s guidance?
- What is the big-picture impact of this event?
It may be worth comparing how other instances of federal aid are treated. For instance, FFCRA leave is credited to the overhead rate, potentially setting a precedent. The tax treatments for various credits under the CARES Act also present intermingling issues for PPP forgiveness.
Businesses must understand the potential financial impacts regardless of how they treat their PPP funds. Additionally, some states tax the forgiveness or disallow the deductions on forgiven (or to-be-forgiven) PPP loans. Requesting forgiveness for a business located in those states can be problematic, as they grapple with the short- and long-term cash flow and income implications of forgiven PPP loans.
Aldrich is Here to Help
We recognize that architects and engineers play an integral role in the success of the built environment and infrastructure. In this complex landscape, with ongoing and sometimes conflicting guidance, our team is consistently monitoring congressional testimony and the American Council for Engineering (ACEC) developments. We’ll be continuing to update our PPP Resource Center to keep you informed of new requirements and guidance—and how to interpret them for your firm.
If you have questions about FAR requirements and navigating PPP loan forgiveness, please feel free to contact me for an individual consultation.
This article was written with the most current information as of April 16, 2021. Please check back for future updates.
Meet the Author
Diana Strassmaier, CPA, CCIFP®
Aldrich CPAs + Advisors LLP
Diana joined the firm in 2018 with almost two decades of experience serving members of various industries including construction, engineering and architecture, manufacturing and distribution, and government contracting. An expert on conducting overhead audits, Diana works closely with government contracting industry clients to offer clarity on how overhead rates work and help them maximize compensation.... Read more Diana Strassmaier, CPA, CCIFP®
- Indirect cost rate (overhead) audits and consulting
- Financial audits, reviews and compilations
- Business and personal tax planning and preparation
- Certified QuickBooks ProAdvisor
- Management consulting
- Compensation analysis
- Sage Fixed Assets Certified Consultant